Share this
ASC 842 Summary
by Matt Waters, CPA on February 6, 2023
The ASC 842 standard for GAAP lease accounting requires all leases longer than 12 months to be recorded as assets and liabilities on balance sheets.
By now, both public and private companies know they must perform lease accounting under the guidance of ASC 842. But ask many accountants “why” and they don’t have a good answer.
The best way to ensure your company is accurately operating under ASC 842 is to fully understand the new standard and how it came to be.
Origins of ASC 842
With the financial crisis of the early 2000s, the U.S. Securities and Exchange Commission (SEC) wanted to increase the transparency of an organization's financial position for better clarity in lease accounting so financial reporting portrays accurate valuations for investors. One more recent development in the area of regulated financial transparency is ASC 842.
The FASB worked for years to develop a model that would present virtually every lease on the balance sheet with right-of-use assets and lease liabilities. A helpful lease accounting tip for private companies: Gain a thorough understanding of the new ASC 842 guidelines and how it surely impacts your organization.
Defining Lease Accounting
Lease accounting can be simply defined as a set of standards that require an organization to account for their leased assets and the practices and procedures involved in compliance with the standards.
Leased assets may be real estate, manufacturing equipment or airplanes used by another company or organization under a negotiated contract with the company or organization that owns the assets, just to name a few.
Leases are similarly classified as operating leases or finance leases, depending on the terms of the agreements.
Defining ASC 842
Accounting Standard Codification Topic 842, ASC 842 or ASU 2016-02, is the new leasing standard to replace the U.S. Generally Accepted Accounting Principles (GAAP) ASC 840 – a nearly 40-year-old standard.
Created by the Financial Accounting Standards Board (FASB), the purpose of the new lease accounting standard is to require organizations that lease assets to disclose the assets and liabilities of their leases on the balance sheet.
The former lease accounting standard (ASC 840) instead reported operating leases in the footnotes of financial statements.
Understanding ASC 842
ASC 842 replaced ASC 840 after Dec. 15, 2018 for fiscal years and interim periods within those fiscal years for public companies and is going into effect for private companies in early 2023 for fiscal years and interim periods within those fiscal years.
The new leasing standard ASC 842 specifically addresses an issue found in previous reporting methods regarding these leased assets and closes what many consider to be a major accounting loophole in off-balance sheet operating leases.
Much the same as its predecessor, ASC 840, ASC 842 still classifies lease management in two groups. The first group includes operating leases and finance (capital) leases. The second group includes leases lasting more than 12 months that must be reported on the balance sheet.
However, the ASC 842 standard also requires more robust qualitative and quantitative disclosures.
When the FASB and the IASB started the lease accounting project years ago, the goal was to create a unified set of rules requiring a balance sheet presentation of lease liabilities. Operating leases were widely considered to be a source of off-balance sheet financing, which is why the boards pursued requirements for adding assets and liabilities associated with leasing to the balance sheet. The goal of requiring almost all leases to be presented on the balance sheet was accomplished. However, the boards did not achieve full convergence of the specific rules. The FASB decided to retain a two-model approach with operating and financing leases, while the IASB selected one model for all leases.
More on ASC 842
For more information on the details and history, visit The Financial Accounting Standards Board (FASB) and the Accounting Standards Update (ASU), see www.fasb.org.
Share this
- ASC 842 (78)
- Lease Accounting Software (62)
- Accounting Teams (38)
- Lease Administration Software (18)
- Retail Tenants (13)
- Commercial Real Estate (11)
- Lease Management (10)
- Market Data and Analytics (7)
- Real Estate Teams (6)
- ESG (5)
- Success Stories (5)
- News and Media Coverage (3)
- Transaction Management Software (2)
- Customer Success (1)
- Office Tenants (1)
- August 2024 (5)
- July 2024 (3)
- June 2024 (3)
- May 2024 (4)
- April 2024 (1)
- February 2024 (1)
- December 2023 (4)
- November 2023 (6)
- October 2023 (4)
- September 2023 (2)
- August 2023 (2)
- July 2023 (3)
- May 2023 (2)
- March 2023 (1)
- February 2023 (3)
- December 2022 (3)
- November 2022 (4)
- October 2022 (4)
- September 2022 (1)
- August 2022 (4)
- June 2022 (1)
- May 2022 (4)
- April 2022 (8)
- March 2022 (3)
- February 2022 (1)
- October 2021 (2)
- September 2021 (1)
- August 2021 (15)
- July 2021 (3)
- June 2021 (1)
- May 2021 (1)
- April 2021 (3)
- March 2021 (1)
- January 2021 (1)
- December 2020 (3)
- November 2020 (1)
- October 2020 (2)
- September 2020 (2)
- August 2020 (3)
- July 2020 (2)
- June 2020 (3)
- May 2020 (1)
- April 2020 (1)
- March 2020 (1)
- February 2020 (1)
- December 2019 (1)
- October 2019 (1)
- September 2019 (2)
- August 2019 (3)
- July 2019 (2)
- April 2019 (69)
- October 2018 (1)
- August 2018 (1)
- July 2018 (1)
- June 2018 (1)
- May 2018 (1)
- April 2018 (2)
- March 2018 (3)
- February 2018 (2)
- December 2017 (1)
- August 2017 (3)
- June 2017 (2)
- May 2017 (2)
- April 2017 (1)
- March 2017 (2)
- January 2017 (2)
- November 2016 (2)
- July 2016 (1)
- June 2016 (1)
- July 2015 (1)
- March 2015 (1)
- June 2014 (1)
- April 2014 (11)
- October 2011 (1)
You May Also Like
These Related Stories
![Where to find your lease agreements for ASC 842](https://costarmanager.com/hubfs/Where%20to%20find%20your%20lease%20agreements%20for%20ASC%20842.jpg)
Where to find your lease agreements for ASC 842
![ASC 842 Improves Outcomes for Companies with Operating Leases](https://costarmanager.com/hubfs/Imported_Blog_Media/ASC-842-Improves-Outcomes--3.png)
ASC 842 Improves Outcomes for Companies with Operating Leases
![ASC 842 Transition Stakeholders](https://costarmanager.com/hubfs/Lease%20accounting%20compliance%20transition%20team%20roles%20stakeholders-1.jpg)